AMD shares rally on Q4 sales outlook

Analysts not ready to say chipmaker is out of trouble

By

ChrisKraeuter

SUNNYVALE, Calif. (CBS.MW) - Shares of Advanced Micro Devices shot up 24 percent on Thursday after the chipmaker reported a wider-than-expected third-quarter loss, but said it expects significantly higher sales in the fourth quarter.

AMD also said it will implement "additional and aggressive actions" to further reduce its breakeven point during the fourth quarter. AMD plans on sustaining positive earnings before interest, taxes, depreciation and amortization by the second quarter of 2003.

Shares
AMD, -2.30%
closed up 84 cents at $4.33, but off of an opening price of $4.87.

AMD's announcement about significantly higher fourth-quarter sales comes one day after its main rival for the sale of computer chips, Intel, said its fourth-quarter revenue would be flat to only slightly higher. Intel's third quarter-sales, though, did not fall off and actually increased.

AMD expects sales during the final quarter of the year to increase 20 percent sequentially to about $609 million. The company said it will report an improved loss, as well, and its EBITDA will be near breakeven.

While investors clearly liked what AMD had to say, analysts were not so quick to recommend jumping back into AMD.

"The plans sound good, but it is difficult to ascertain the company's probability of success at this time due to the lack of detail," wrote Needham analyst Dan Scovel this morning. He recommended investors wait for more details likely to be provided at AMD's annual analyst meeting on Nov. 7.

Eric Ross with Investec also recommended waiting for the analyst meeting. "While valuation is below 1996 and 1998 troughs, we would remain cautious until near-term financing issues are resolved and its corporate strategy for 2003 is better understood."

Credit Suisse First Boston analyst Tim Mahon took a dim view of AMD's plans. "We are skeptical of AMD's ability to cut costs of this magnitude without impacting revenue growth, and have accordingly diverged from the company's suggestions regarding costs and breakeven." He widened his loss targets and lowered his revenue assumptions through 2003.

Third quarter

As for actual results during the quarter ended in September, AMD posted a loss of $254.2 million, or 74 cents a share, on revenue of $508.2 million. During the same quarter last year, AMD lost $186.9 million, or 54 cents a share, on revenue of $765.9 million.

During the second quarter, AMD lost $184.9 million, or 54 cents a share, on revenue of $600.2 million.

On Oct. 2, AMD announced preliminary results for sales of $500 million and that it would post an unspecified, but "substantial" operating loss. At that time, analysts were expecting a loss of 49 cents a share on sales of $614 million.

Based on the most recent survey of analysts, the consensus numbers reflected expectations for a loss of 67 cents a share on sales of $500 million.

The company said it aggressively reduced its channel inventory during the quarter and that impacted its sales, as did lower-than-forecasted demand. AMD said if not for the inventory correction, it would have posted sales of more than $600 million.

AMD also disputed Intel's claim that it took overall market share during the third quarter. AMD executives said it held steady, based on the number of computers sold, instead of basing share on the number of microprocessors shipped to computer makers.

Memory sales at AMD rose 8 percent to $189 million.

Headcount declined 3.7 percent to 13,218 from the previous quarter. During this time last year, AMD employed 15,152, reflecting a decline of 13 percent.

AMD's cash balance declined 20 percent to $891 million from the previous quarter while long-term debt edged up to $1.2 billion from $1.17 billion. At this time last year, AMD held $870 million in cash and $673 million in long-term debt.

AMD's cash burn rate was actually closer to $300 million; it received $108 million in asset financing. The company also plans on receiving another $47 million in asset financing this quarter. With this financing, plus reductions in capital expenditures, and other cash expenses, AMD said it is funded through 2003.

AMD said cost reductions lowered its breakeven point to $875 million in quarterly revenue from a $900 million breakeven point during the previous period. CEO Hector Ruiz said he is targeting breakeven results in the second quarter of 2003 on revenue of $775 million.

"We are trying to work ourselves into a self-funding model where we don't have to go to the capital markets unless we want to," said Chief Financial Officer Bob Rivet, adding that future cost reductions will come from all parts of the company and that the product roadmap is the only untouchable part of the budget.

Executives insisted cost reductions would not delay product launches or development projects. The company's much-anticipated Hammer family of chips will begin shipping in the mid first-half of 2003.

Fourth quarter

For the quarter ending in December, AMD expects a "significant" increase in sales of its Flash memory devices. Further, a seasonal uptick and better inventory situation is expected to yield higher PC processors sales.

Taken together, AMD said its fourth-quarter sales will increase 20 percent to around $609 million and its operating loss will be "significantly reduced." Analysts had expected a loss of 57 cents a share on revenue of $559 million, on average.

AMD said it will take an unspecified charge during the quarter for cost reductions, but that its EBITDA should be close to breakeven.

CFO Rivet said his order backlog for both memory and computer chips is the best it's looked in the previous five quarters.

For the entire year, the capital expenditure budget was cut to $750 million from $800 million, which in turn was cut from $840 million at the end of the second quarter. Intel cut its cap-ex budget yesterday as well.

Also, AMD said its capital budget next year will be significantly less than this year's outlay.

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